Citizens Financial Group Inc (CFG) — Q2 2017 Earnings Call Transcript

Thanks so much, John, and good morning to everyone. We really appreciate you joining us for our second quarter earnings call. Our Chairman and CEO Bruce Van Saun and our CFO John Woods are going to spend some time reviewing our second results. And then we'll open up the call for questions. We are pleased to also have on the call today with us Brad Conner, Head of Consumer Banking and Don McCree, Head of Commercial Banking. I'd like to remind everybody that in addition to our press release today, we've also provided presentation and financial supplement, and these materials are available on investor.citizenbank.com. Of course, our comments today will include forward-looking statements and those are subject to risks and uncertainties. We provide information about the factors that may cause our results to differ materially from expectations in our SEC filings, including the Form 8-K we filed today. We also utilize non-GAAP financial measures and provide information and a reconciliation of those measures to GAAP in our SEC filings and in our earnings material. And with that, I am going to hand it over to you, Bruce.

Okay. Thanks, Ellen. Good morning, everyone. And thanks for joining us on our call today. We are pleased to report another quarter of strong results as our momentum continues. We have a terrific leadership team and continue to execute well on our strategic initiatives. We are balancing our desire to build a great franchise for the long term with our need to deliver consistent financial progress in the near term. We are turning the corner, so to speak, from our turnaround phase to a new growth phase, with a desire to become a top-performing regional bank. I believe our customer-centric culture, our mindset of continuous improvement in how we run the bank, and our commitment to excellence in key capabilities are the unique ingredients that will allow us to stand out in a crowded banking landscape. As to current performance, the highlights of the quarter from my perspective include strong revenue growth, good expense discipline, and positive operating leverage. Our fee-based businesses continue to gain traction, and our credit quality, capital liquidity, and funding position all remain excellent. Revenue growth was 10% year-on-year and operating leverage of 7.4% on an underlying basis before lease impairment impact. Our ROTCE at 9.6% is approaching 10%, and our underlying efficiency ratio was 60.4%. John will take you through our outlook in a few minutes. But in short, we continue to have a positive outlook and we believe there is plenty of fuel left in the tank to propel the next leg of our journey. We announced our TOP IV program today, which is now following a seasonally predictable pattern. We've assembled a series of revenue and expense initiatives that we project will benefit pretax income by about $100 million by the end of 2018. These TOP programs have been pivotal in our ability to deliver consistently high levels of operating leverage while also creating the capacity to invest in growing our franchise and our capabilities, including some great progress that we are making in digital, data analytics, and process automation. We've done a good job of analyzing how banking technology and consumer behaviors are changing, and increasingly we are playing often and making investments that will strengthen us well into the future. We also announced a 29% increase in our quarterly dividend with CCAR approval for another 22% in early 2018. Combined with authorization for $850 million of share repurchases over the next 12 months of CCAR period, we aim to deliver a strong return of capital to our shareholders. Our CET1 ratio will continue to normalize back towards peer levels with time. So with that, let me turn it over to our CFO, John Woods, to take you through the numbers. John?

Thanks, Bruce. And good morning, everyone. Let's get started with our second quarter financials. We'll start on Slide 4. We generated net income of $318 million and diluted EPS of $0.63 per share. Our reported net income was relatively stable compared to the first quarter, which as a reminder included the benefit of approximately $23 million related to the settlement of certain state tax matters that contributed $0.04 EPS. On an underlying basis excluding the benefit, net income for the second quarter was up 7% and EPS was up 11% in each quarter. Year-over-year, net income was up 31% and EPS was up 37% year-over-year. Our second quarter results included a $26 million pre-tax charge related to impairment on aircraft lease assets primarily in our non-core portfolio, which is in runoff mode reflecting a more recent continued decline in value of select categories of aircraft. The impact of these impairments reduced noninterest income by $11 million and noninterest expense by $15 million. In order to better understand our underlying performance, we've prepared a supplemental schedule which backs this impairment out of PPNR and reclassifies it as credit-related costs. On this basis, our total credit-related cost came in at $96 million, which was stable compared with the first quarter and up modestly year-over-year. On a reported basis, we delivered positive operating leverage of 5% year-over-year. Excluding the impact of the lease impairment, our operating leverage was 7.4%, reflecting revenue growth of 10.1% and expense growth of 2.7%. Net interest income of $1.03 billion increased 2% in the linked quarter, driven by loan growth of 1%. And net interest margin increased 1 basis point in each quarter and 13 basis points year-over-year. We'll spend more time on the margin in a few minutes. Noninterest income of $370 million declined by $9 million on a reported basis but was up modestly before the impact of lease impairment. On a year-over-year basis, noninterest income was up 4% or 7% on an underlying basis. For the second quarter, on a reported basis, our efficiency ratio came in at 61.9%, but this was impacted by the lease impairment. On an underlying basis, the efficiency ratio includes 132 basis points with 60.4% and 435 basis points year-over-year. We delivered second quarter ROTCE of 9.6%, which was relatively stable with the first quarter but increased to 9% on an underlying basis and from 7.3% year-over-year. These strong results reflect continued execution of our strategic initiatives and our commitment to driving revenue growth while maintaining operating expense discipline. As you know, we are always looking to find ways to run the bank better and leverage the potential of our franchise. In a few minutes, I'll walk you through the next phase of our TOP program, which will contribute further efficiencies and revenue opportunities for us, while funding investments to drive future growth. Taking a deeper look into NII and NIM on Slide 5 and 6, we continue to deliver strong balance sheet growth, which helped us drive a 2% increase in NII for the quarter. We grew average loans 1% linked quarter and 6% year-over-year, and I'll provide some additional detail on the growth in a few minutes, including the impact of our balance sheet optimization effort. Net interest margin increased 1 basis point linked quarter and 13 basis points year-over-year, which reflects a nice improvement in loan yields given the pickup in short rates and the benefit of our balance sheet optimization efforts, which are improving the mix of our portfolio for its higher return category. These benefits were partially offset by a 2 basis point drag due to increased securities premium amortization as the average 10-year yield decreased by about 20 basis points linked quarter. We also saw an increase in funding costs this quarter. We issued $1.5 billion in senior debt in May, given very attractive market conditions, which was a bigger and earlier issuance than planned. Deposit costs were higher reflecting the rise in short rates and the impact of seasonally lower DDA balances. Note that we grew period-end deposits by over 1% in the second quarter and spot LCR declined modestly to 96.6%. Turning to fees on Slide 7, noninterest income was down 2% linked quarter, including an $11 million impact from the lease impairment reported in other income. Excluding the impairment, linked quarter fees were up slightly driven by another record quarter in capital markets due to continued momentum as we leverage the investments we made in talent and broadening our capability. Market conditions were strong in the second quarter, which helped drive robust activity in loan syndication. We grew loan syndication fees by 23% as we increased the number of lease or joint lease transactions by 34%. We also saw record mortgage banking fees, which were up 30% reflecting higher origination volumes and loan sale gains. Linked quarter service charges were up from a seasonally lower first quarter. Letter of credit and loan fees increased 7% driven by an increase in commercial loan prepayment fees. Most remaining fee categories were stable in quarter. On a year-over-year basis, we delivered very good noninterest income growth of $26 million, or 7% on an underlying basis. We are pleased by the strong contribution provided from the capital market business given our expanding capability and from mortgage banking, which benefited from higher production fees. We also saw momentum in card fees, which reflected the benefit of revised contract terms for processing fees that commenced in the first quarter along with higher purchase volume. Turning to expenses on Slide 8, we saw a $10 million increase in linked quarter expenses, which included a $50 million impact from the lease impairment reported in other expenses. Before these charges, expenses were down $5 million, primarily due to a seasonal decrease in salaries and benefits. Occupancy costs were also slightly lower as costs associated with our branch rationalization efforts and seasonal maintenance costs were higher in the first quarter. Outside services costs were $5 million higher as a result of an increase in consumer loan origination and servicing costs. Year-over-year, expenses increased 4%, including higher other expenses driven by the $15 million in lease impairment but were up 3% excluding this charge. Salaries and benefit expenses were stable as the benefit of the change in the timing of incentive payments for the first quarter this year offset an increase in compensation and the impact of strategic hiring. We continue to look for ways to self-fund our growth initiatives and are doing a good job of finding efficiencies and staying disciplined. Let's move on and discuss the balance sheet. On Slide 9, you can see we continue to grow our balance sheet and extend our NIM. Overall, we grew average loans by 1% linked quarter and 6% year-over-year, driven by strength across most of our commercial business lines and in education, mortgage, and unsecured retail on the consumer side. The growth in commercial loans is partially offset by the sale of $596 million of lower-return commercial loans and leases near the end of the quarter associated with our balance sheet optimization initiative. Our period-end loan growth would have been 1.4% excluding the impact of the sale, in line with our guidance. As I mentioned, NIM was up 1 basis point in the quarter and 13 basis points year-over-year. Our loan yields continue to improve given our balance sheet optimization effort, along with continued discipline on pricing. It also benefited from higher LIBOR rates during the quarter. With assets and securities seeing a gradual rise in rates at 5.5% versus 6% last quarter, our asset sensitivity is naturally moderated given the rise in the environment. On Pages 10 and 11, we provide more details on the loan growth in consumer and commercial. In consumer, 7% average year-over-year growth is led by continued strength in the residential mortgage, education, and other unsecured retail loans, which continue to be driven by our product financing partnership and personal unsecured product. We are seeing ongoing benefits from our focus on enhancing our portfolio mix by driving growth in higher-return categories. As I mentioned in the last call, we are slowing growth in auto, and that should continue in the second half of the year. As a result of these efforts, in addition to higher rates, we've expanded consumer portfolio yield by 12 basis points in the quarter and 30 basis points year-over-year. We also saw nice growth in commercial, with average loans increasing 6% year-over-year, where we continue to execute well in commercial real estate, mid-corporate, middle-market, industrial verticals, and franchise finance. The increasing rates and enhanced vigor around portfolio returns have helped drive the 16 basis points improvement in linked quarter and a 52 basis points increase year-over-year. On Page 12, looking at the funding side, we saw a 7 basis points increase in our total funding cost, driven by an increase in deposit costs, which included the impact of seasonally lower DDA and the impact of $1.5 billion senior debt issuance. Year-over-year, our cost of funds was up 14 basis points reflecting a continued shift to greater long-term funding along with the impact of higher rates. This compares with asset yield expansion of 27 basis points. Next, let's move to Slide 13 and cover credit. Overall credit quality continues to be excellent reflecting the continued mix shift towards high-quality, lower-risk retail loans compared with the growth in the larger company segment of our commercial book. The nonperforming loan this year decreased 3 basis points to 94 basis points of loans and improved from 101 basis points a year ago. The net charge-off rate decreased to 28 basis points from 33 basis points in Q1. Retail net charge-offs increased modestly from the first quarter while our commercial net charge-off was lower by $5 million. Provision for credit losses of $70 million was $5 million less than charge-offs. This was a decrease of $26 million from first quarter levels. However, including the lease impairment, total credit-related costs were stable at $96 million. As we increase the mix of higher quality retail portfolios in our overall loan book, our allowance to total loans and leases has come in at 1.12%, while the NPL coverage ratio has been relatively stable at 119%. This also reflects continued runoff in the non-core portfolio. On Slide 14, you can see that we continue to maintain a strong capital and liquidity position. We ended the quarter with a CET1 ratio of 11.2%. This quarter, as part of our 2016 CCAR plan, we repurchased 3.7 million shares and returned over $200 million to shareholders, including dividends. It's also worth noting that the total amount returned to shareholders in the 2016 CCAR window was $957 million, including dividends. As you know, we received the non-objection to our 2017 CCAR capital plan, which includes up to $850 million in share repurchases. We announced an increase in our dividend today by 29% to $0.18 a share. And we also have the ability to increase the quarterly dividend again to $0.22 per share in early 2018. On Slide 15, we show the benefit from executing against our strategic initiatives. We are intensely focused on developing strong customer relationships and growing the franchise in a profitable and sustainable way. In the consumer business, we are committed to building strong relationships with our customers and through our talent advice and product strategies along with enhancing our distribution network and digital offering. These investments are well-aligned with our wealth effort, as we also continue to enhance our advisory capabilities and build out a Mass Affluent and Affluent guiding proposition. We continue to drive attractive loan growth across several areas such as in our education refinance loan product, which has an attractive risk-adjusted return. As we optimize the balance sheet, we continue to reduce the auto portfolio in order to enhance returns. In wealth, we saw nice growth in fees year-over-year, with total investment sales up 14% linked quarter and 27% year-over-year. We continue to make progress on a year-over-year basis in shifting the mix of sales towards more fee-based business, which came in at 38%, up from 20% in Q2 2016. In addition, our FC headcount is up 12% year-over-year, which is contributing towards the scaling of the business. And in mortgage, we continue to make progress including secondary originations, which were up 14% year-on-year, an increase as a percentage of total originations from 33% to 38%. In commercial, our expanded capabilities helped deliver another record quarter in capital markets. As we continued to leverage the investments we've made in broadening our capability. Treasury solutions are on the right track with fee income growth up 8% year-over-year, and strong momentum in our commercial card program. Mid-corporate and middle-market benefited from our initiatives to deepen customer relationships with loan balances increasing 4% and deposits up 11% year-over-year. We've seen strong balance sheet growth in our expansion markets and more modest growth in established markets. Moving on to Slide 16. With TOP III, we have successfully delivered efficiency that has allowed us to self-fund investments to improve our platform and product offerings. In 2016, our TOP II program delivered $105 million in annual pretax benefit across our revenue and expense initiatives. We've largely completed the actions needed for the TOP III program, which launched in mid-2016 and is expected to deliver a run-rate benefit of approximately $110 million by the end of 2017. Slide 17 has the details on our TOP IV program, which is a further example of our commitment to continuous improvement and delivering value to our shareholders. Through a combination of initiatives to enhance revenues and realize efficiencies, we are targeting a run-rate pretax benefit of $90 million to $105 million in 2018. On the revenue side, we are focused on building new channels primarily to enhance our digital capabilities and building out our direct-to-consumer mortgage program and leveraging our call center to offer solutions to our customers. We also plan to add corporate partnerships and installment lending, expand C&I lending in the Southeast, and expand our commercial real estate offering. We'll also continue to build out our fee-generation capabilities in the mortgage business and securitization capabilities for third-party commercial clients. On the efficiency side, we'll continue to focus on simplifying our organization, leveraging centers of excellence, and rationalizing roles and responsibilities for the bank. We'll take a hard look at reengineering key processes to leverage automation and become more efficient. We'll optimize our technology infrastructure and streamline our network support. Our management team is committed to realizing the full benefits of our TOP program to serve our customers better, make the company stronger, and deliver long-term value for our shareholders. On Slide 18, you can see the steady and impressive progress we are making against our financial targets. Since Q3 2013, our ROTCE has improved from 4.3% to 9.6%. Our efficiency ratio has improved by 6 percentage points over that same timeframe from 68% to 61.9%, or by 8 percentage points to 60.4% on an underlying basis. And EPS continued on a very strong trajectory, more than doubling from $0.63 from $0.26. The rate of growth and improvement continues to outperform peers over the period. We realize we still have work to do. Let's turn to our third quarter outlook on Slide 19. We expect to produce linked quarter average loan growth of around 1%. We also expect net interest margin to continue to expand by about 3 basis points linked quarter, given continued improvement in our earnings asset yield and improved funding mix. We continue to project full-year loan growth to be within the 5.5% to 7% full-year guidance range. In noninterest income, we are expecting to see a modest decrease, given seasonal factors such as a strong second quarter result in capital markets. We expect expenses to increase slightly in the third quarter with a relatively stable efficiency ratio. Additionally, we expect provision expense to be higher in a likely range of $85 million to $95 million, a modest increase in net charge-off. And finally, we expect to manage our CET1 ratio to around 11% and expect the average LDR to be around 98%. Regarding the full-year 2017 outlook, we expect to come in above the high end of the range for NII and operating leverage, and below the range on provision and within the range for loan growth. So with that, let me turn it back to Bruce.

Well, thanks, John. On Slide 20, we've included our updated vision, plan, and credo statement. We are turning the corner, moving out of our turnaround phase and shifting gears to focus on what it takes to be a truly top-performing bank. The key to sustainable success is to stay focused on our customers and colleagues to bring out their best. On Slide 21, we lay out what would distinguish us in a crowded banking landscape. A strong culture focused on the customer, our commitment to financial discipline, and achieving excellent capabilities in key areas. And on Slide 22, we make the case that there is plenty of fuel left in the tank to propel our ROTCE higher. The same levers that propelled us from roughly 4% ROTCE to 10% are still in place, and our management has a proven track record of execution. To sum up, on Slide 23, our strong results this quarter demonstrate our ability to execute against our strategic initiatives and continue to improve how we run the bank to drive underlying revenue growth and carefully manage our expense base. Our outlook remains positive as we work to become a top-performing regional bank. So with that, John, let's open it up and we'll take some questions.

Yes. Thank you for taking my call. Good morning. My first question is on future capital return. Clearly, the announcement from the 2017 CCAR was very strong. And you have stronger loan growth than peers. That being said, the 11% target for the end of the third quarter on CET1 seems robust still relatively to your risk profile and size. And I am wondering as we look further out over the next two or three years, should we expect your capital total payout to grow? Bruce, maybe give some insight on how you are thinking about dividend versus buyback in future CCAR?

Yes. Sure. So what we've been progressing through time since separation from RBS is what I referred to as a glide path of normalizing our capital ratios. This year, we gave guidance range that we likely ended 10.7 to 10.9 down from roughly 11.2 when the year started. I still think we will achieve that, so we are on track to come in within that range. I think we can continue to follow a glide path down in subsequent CCAR in the second half of this CCAR cycle, i.e., the first half of 2018 and then in future CCAR cycles. Our view is that we have so far been a bit prudent as a new company, keeping a little bit of capital buffer to give us the flexibility to both grow loans and return a good level of capital to shareholders. We can continue to do that into another cycle or two. There is no reason at the end of the day that we should have to sustain that buffer or loss profile, credit loss profile, which is below the median vs peers. So, I think we have a good level of discipline and risk appetite, and we certainly can manage down towards the median level of peers. What you are hearing from peers is they’d all like to be lower as well. So we are following them down. If they continue to move down, we can continue to move even further. With respect to the dividend versus capital, I think we have always viewed it as important to have a good dividend on the stock and a good yield. Now that the Fed appears to have no longer a bright line at 30% payout ratios, we are starting to move ahead of that, and I think we have confidence in our earnings trajectory that we can continue to raise that dividend and raise it at a good clip and be able to sustain that dividend and take it even higher. That’s really important to us. We will also continue to repurchase shares. I think $850 million is up meaningfully from what we repurchased last year. So, as earnings grow and our capital generation grows, it gives us the flexibility to kind of have our cake and eat it too. We can raise the dividend, we can buy back stock, and we can grow loans. I don't know, John, if you want to add anything to that.

No. I just think that with respect to the buyback, I think we are feeling very strong about that outlook. One thing we are trying to do is balance our opportunities to deploy capital internally against returning that to shareholders. And I think we'll have to do that going forward.

Thank you. That was clear. Just as a follow-up question, given your more robust loan growth prospects than peers, and you also mentioned in your TOP IV initiative, expanding commercial lending in the Southeast. In line of the 97% LDR, how should we think about your deposit-gathering strategies from here? Really, how should we think about pricing from here in terms of trying to keep up the pace of loan growth and deposit growth? And whether or not buying deposits further down the line is part of the plan?

I'll start, and John you can follow up. But I think we've done a good job of sustaining good deposit growth that’s kept pace with the loan growth. So obviously when we sold the Chicago franchise, we took the LDR from roughly 93 up to 98. Now, basically we’ve been on a treadmill where when we grow loans, we grow deposits at a similar clip. Where we've focused has been on the commercial side, where when RBS ran into difficulty and we ran our balance sheet down, we ran off a lot of the commercial deposit base. So we’ve been on a mission to go out and get the operating account and grow interest-bearing deposits from the commercial side. I'm pleased to see that this quarter, by the quarter-end spot basis their LDR is low on 60. It had been higher at 250 at one point. I think there’s still room to run in terms of leveling that out and maybe ultimately getting that commercial LDR in the 140 to 150 range, which is probably where peers are. We had that going on the consumer side, continuing to focus on better tools, better data analytics into customers so we can make more tailored offers and bring in incremental funds that our customers have away from us, but we’d like to bring onboard into the bank. I think we can find ways to do that cost-effectively without raising the overall cost of our backbook. Those are some of the initiatives that will continue but I think we’ve demonstrated a good track record of being able to manage in a basis of kind of high 90s, 97 to 99. I think over time, we'd like to bring that down a bit, maybe 95 to 97. But we are very comfortable with where we are. Our LDR is really strong so the fact that we have so many consumer deposits and we termed out a lot of our wholesale borrowing with the senior debt issuance and terming out some of our FHLB advances, we have a very strong overall funding profile. John, do you want to add to that?

Yes. Just, well, I think the growth in our deposits are tracking in line with our expectations. We're optimizing our balance sheet across businesses, targeting higher-value customer segments and looking at long-term growth in the checking and cash management businesses. On that last two on the commercial side where we are seeing some growth, we are making investments in our technology replatforming, and we think that's going to pay us nice growth in the deposit side going forward. One other point, we've been able to deploy these deposits with very attractive returns, double digits well above capital. So we are feeling very good about where these deposits are getting deployed, given unique opportunities on the asset side.

Yes. And just to your last point, Erika, I don't think we are in the market or in the hunt to go out and buy deposits. I think we think we can grow. We probably look at a digital strategy to gain some additional deposits before we go out and actually purchase deposits.

Good morning. Could you provide more detail about the projected 3 basis points increase in the net interest margin? While it is slightly better than what many competitors anticipate, it's also following a second quarter net interest margin that only increased by 1 basis point. Additionally, considering your bank's asset sensitivity, it seems there could be more growth in net interest margin based on your balance sheet positioning, especially given the impact from bond premium amortization.

Yes. Maybe I’ll start briefly and then John, I know you can handle this one. But what I’d say is there were some idiosyncratic factors in Q2 that affected the increase that we expected to see. The first one was that not only did we not get a parallel shift when the Fed moved, which can dampen the full benefit of your position, your asset sensitive position, we actually saw a flattener, so the 10-year on average was down 20 basis points during the quarter. That created a drag that was not anticipated and that creates the securities premium amortization which roughly had a 2 basis point impact on the NIM. And John, you can talk about third quarter but in brief, we would not expect to see the 10-year move dramatically; it will be range bound so we are not relying on a rebound to get the 3 basis points lift. So the hit happened in Q2. Does that show you upside beyond the 3 basis points in Q3 if you saw a reflation back end of the curve just to be clear on that point. The other thing that was idiosyncratic to us was that we went out and issued $1.5 billion in senior debt and we had anticipated an issuance size of about half of that but as you are seeing, it’s been very conducive in the market when rates come down to go issue and lock in spreads in attractive financing terms. So we upsize, and we went earlier than we had anticipated which I think is the right thing to do. Again, it locks in a very good piece of debt in our funding structure that will benefit us many quarters into the future. So we can take a basis point hit there for being opportunistic and you should feel fine about that. So that will not recur in Q3 either. That’s why when you look at the things that hit us a little bit in Q2, we would not expect to see those things hit us in Q3. We should get the full quarterly run rate benefit of the Fed hike which came relatively late in the second quarter. John, over to you.

Yes. So, I think you covered it, Bruce. I’d just say to reiterate the points related, securities premium amortization we had a both the 5 year and the 10 year were down, causing a cost of 20 basis points quarter-over-quarter. That led to a desired effect on NIM. So, as you mentioned, those are the latest. When you look at out the 3Q, a couple of points I made there. I think you made the point that we are not relying on increases in the 5 and 10 years in order to support that outlook, so I think that's important to note. We are indicating the absence of that drag; we are expecting even now we think more of a range bound view. Also note loan yields are expected to expand similar to the second quarter. We had strong loan yield expansion in the first and second quarters. We are expecting to see that in the third quarter. The June hike, of course, we'll see that fully layered into the C&I book, but I'd mention the fact we are going to see the full quarter effect of the March hike on our large HELOC portfolio. Some of you may know we only get two months of benefit in the second quarter with that portfolio, and we are going to get three months in the third quarter. So those are the levers that I highlighted. We feel good about our guidance which we have given.

Hi, thanks. I guess two questions in particular. One of your peers was BB&T, but they announced sort of that they had asked the Fed for an accelerated buyback earlier than sort of now over the average of the year. When you asked the Fed for approval to buy back shares, did you put in any kind of acceleration that more buyback could be done in the first half, or did you spread it equally over the course of the year? Thanks.

We typically haven't called exactly how we've staged that, Ken, but generally speaking, we've been pretty much averaging on that. We will take advantage of ASRs during the quarter to get a bump by taking those shares out day one of the quarter. So we’ve been doing that. If we want to accelerate, we would have to make a new request to do that.

Got it. Okay, that helps. And then second question just in terms of provision expense. Obviously, good quarter this quarter, your guidance is better than what I was expecting for next quarter. But when you look out to the first quarter next year, is the factors, the underlying drivers of the improvement in credit quality, is it enough to keep provision expense/reserve release happening over the next several quarters, or is there a point where provision does start to take up all things equal. Thanks.

I believe we are entering this year with around 325 or 330 in charge-offs for provision from last year. As we start this year, we are considering adjusting that figure to potentially somewhere between 425 and 475. Our expectation is that as we continue to grow our loan portfolio, we will need to increase our provision, and that the commercial sector, which has experienced very low charge-offs, will begin to stabilize. Today, we indicated that for the year, we anticipate staying well below the higher end of that range. Currently, we are monitoring the situation closely. The reason for this optimism is that the commercial sector remains in excellent condition, with no significant trouble spots or concerns. Of course, unexpected issues can arise, but we are hoping to avoid any. The outlook for commercial remains positive. On the consumer front, the high-quality assets we are adding to our portfolio keep us in a strong position, and our delinquencies also look promising. Thus, we expect the trend to remain favorable, suggesting a gradual rebuilding of those levels over time. We will provide guidance for next year soon, but for this year, we remain optimistic about both Q3 and Q4.

It's Don. I think that's exactly right and we've got a very good process now that we call to the portfolio and have a lot of early warning signals. We can see out a few quarters in terms of general trends in the portfolio. As we continue to participate and grow in this market, we are trying to stay very disciplined from a new origination standpoint, knowing markets are very aggressive right now.

And Brad, could you share your thoughts? We've seen some recoveries from the runoff of legacy core assets, which is beneficial. This gives you room to pursue growth.

Exactly. And as you said, Bruce, the stability of the asset that we are putting on remains very good. Delinquency looks strong. We had given a little bit more detail guidance two months back about what our range of losses would look like over the next year and a half or so, and we remain very confident in the guidance that we gave there. All the trends remain right in line with what we talked about.

Thank you, good morning. First, you mentioned your desire to become a top-performing bank and you gave us, I think it was on slide 20, 21, some of the internal niche or cultural issues that you guys are focused on. Can you share with us what some of the financial metrics will be that you're looking at to achieve this top-performing status? And when do you think you might be able to reach those metrics?

I think it's a little premature, Gerard, to tell you what the next set of metrics are. I want to achieve the ones that we set out to achieve when we went on the IPO journey. We are getting close, and that feels quite good. Stay tuned. I think we will in due course be rating to put out the ROTCE target, obviously efficiency ratio, ROA, those are the measures that investors look for. As we've said, we have plenty of fuel in the tank to continue to execute our strategy. What works for us going from 4 to roughly 10 should work for us going forward. We should have plenty of capital to put to work to grow the balance sheet, reduce the share count. We've been investing in the key businesses to broaden our capabilities and figure out how to deepen relationships with our customers, whether they are on the commercial side or consumer side. We are starting to see some benefits flow from those investments which have been great to see. I think we have a real fanatical commitment to positive operating leverage in terms of trying to find ways to run this bank more efficiently and more effectively, serving customers better at a lower cost point. We will continue with that. If we can continue to pull those levers, I think it won't be too long before we'll be able to put out a new set of goal posts.

Yes. Your question, I mean we like where we are right now. I think that we plan to remain an asset sensitive bank and we plan to keep that upside potential and gas in the tank, as you heard from Bruce earlier. There will be pressure over the interest rate tightening cycle, which is pretty natural. But we will continue to have an outlook for exactly where that will be, but we expect to maintain a strong asset sensitive positive over time and continue to participate in the upside on the rate tightening cycle.

One thing you can note, Gerard, is that I think we were at about 6% and it had two hikes since then. Now we've positioned at about 5.5%, so the gradual rise to 200 rise scenario, will give you an indication that just naturally as we get deeper into the hike cycle that sensitivity starts to fall. We are not fighting that, we are just kind of letting that drift down. But relative to peers, we are still one of the more asset sensitive banks.

Good morning. On the expense side, just given now that you've laid on the TOP IV program and on top of the progress you made on TOP III in all itself, I wanted to see if you can give us some color on what that means for the positive operating leverage outlook. For when you look at 2018 and maybe another way to put it, what type of efficiency ratio could we expect for 2018 as this starts to get layered in? Just trying to get an idea of where we are going with this when it hits the numbers. Thanks.

Yes. It's a little early to give 2018 guidance. I think what we've seen from these TOP programs historically is that we are pushing that operating leverage to a 3% to 5% guidance range. If you went back a couple of years ago it was probably 2% to 4%. It’s helpful in that and continuing to sustain a good level of positive operating leverage. I’d probably leave it there for now. We are not ready to give 2018 guidance, but it's certainly helpful to enhance modestly and sustain the operating leverage outlook. It also creates funding capacity for us to reinvest in the businesses to go out and hire more corporate bankers, mortgage loan officers, wealth advisors, and invest in some great new technology offerings in digital and data analytics and things that we are doing. It’s incredibly helpful, and I think what you've seen is that we don't just consume it with other expenses and investments. We've actually been able to be disciplined and let some of that flow through the bottom line and keep the positive operating leverage at close to the top of our peer group on a consistent basis.

Okay. I wanted to follow up on credit. I apologize if you’ve already shared some details, but I understand you’ve indicated that consumer trends remain stable. Specifically regarding auto trends, it’s clear that the industry is facing significant pressure due to declining used car values. I’d like to hear your updated insights on the credit performance in the auto sector. Additionally, I recall you mentioning that your percentage of lead arranger status for shared national credit has increased. What is this percentage of the overall shared national credit portfolio currently? Thank you.

Yes. Regarding auto, I’d like to emphasize that we have increased the credit to achieve better risk-adjusted yields or returns in the auto sector. Therefore, we have observed the auto performance.

You're seeing that migration and I don't think anything is out of the ordinary regarding that.

Right. We are seeing that migration. We are seeing a little bit of losses come off exactly the way we had projected and losses are moving right in line with what we had anticipated.

It's important to note the flipside of that is higher yield on the book.

Exactly, higher yield on the book. And so we look at the trend, I mean certainly we are seeing a little bit of reduction in used car value, but very much in line with what we had projected. We talked about that for the last quarter in terms of making an adjustment to our provision for that expectation that's trending very much in line. In fact, what I'd say is we saw this quarter used car value stabilize, which was a good sign for us.

Hi, good morning. When we look at the loan growth outlook, maybe if you just give a little color on what you are hearing in terms of customer demand. I guess quickly on the commercial side. And then is the outlook you guys are giving kind of expecting the same dynamic where you have fairly steady growth on both the consumer and the commercial side?

Yes. I'll start and flip to John. But I'd say we are pretty consistent with the outlook that we gave in Q2. So we had kind of 1.5% spot expectation which we hit if you exclude the late-in-the-quarter loan sales. Partially that’s a reflection of some of the uncertainty still down in Washington that we saw that boosted in soft data after the election. People are hopeful that there is a Republican President and Congress and that we should be able to affect a pro-growth agenda. It’s been a long time in coming. That uncertainty I still think keeps some of our customers on the commercial side a little reluctant to go full bore and really take down lines that they have or generate some new momentum in terms of capital expenditures or some acquisitions. So that's been the situation until it changes. It looks like we'll go through Q3 in a similar position as what transpired in Q2. I think the consumer generally has been healthy, and we sort out areas where little pockets where we can be distinctive and find some risk-adjusted return areas like education refinance loans and personal unsecured or installment partnerships that we have with Apple that we expand now to Vivin and to HP. So I feel good that the balance we've achieved with growth on the commercial side and the consumer side can continue. But why don't I flip it to you both, Don, for some quick color.

Yes. I completely agree with that. We are seeing a lot of engagement with clients, but a lot of it is around refinancing. Net new money demand is still pretty tepid out there. About 50% of our growth, I'd say is probably net new money and 50% is refinancing of other bank clients. We feel very good about what we are seeing in our origination pipeline. We'd like to see a boom in cash-financed M&A, but we are not seeing it yet. We are seeing private equity flow, really a lot of properties being passed back and forth between private equity firms, so that's not creating net new demand. We are able to capture more than a fair share. I don’t see any reason that’s going to change. Part of our expansion effort into the Southeast and growing New York Metro and growing the Midwest where we’ve added a lot of bankers and new leadership in those markets will allow us to add net new clients, that's what's going to drive the balance of our net new money growth as we look forward.

And we just brought in a new head of the healthcare industry as well.

Okay. Well, thanks again everyone for dialing in today. We certainly appreciate your interest. Again, we believe we are firing on all cylinders. We will continue to focus on disciplined execution of our plan. Thank you and have a good day.